The Sharpshooters

Rational Basis Review Revisited – Part I

Gregory — Thu, 10 May 2012 04:22:32 +0000

In an April 27th CATO podcast, Vice President of Legal Affairs, Roger Pilon cites the case of Hein Hettinga v United States of America (2012). The three person court, which is held to Supreme Court precedents, ruled unanimously to affirm the districts’ ruling that the Milk Regulatory Equity Act of 2005 did not constitute a Bill of Attainder nor did it violate the Equal Protection and Due Process Clauses.

PRECEDENTS

In 1990 the Hettinga’s, with their six dairy farms and acting as a bottler, engaged in a contract with COSTCO that illegally acted to lower the cost of local milk prices by twenty cents putting other producers at a competitive disadvantage yet enhancing consumer surplus. The Supreme Court already set precedence for such specific matters in Nebbia v State of New York (1934) wher the state passed the Milk Control Act, setting a minimum price for retail milk in which Nebbia sold two cents below this price. As a result the court upheld the law and wrote:

“The state is free to adopt whatever economic policy may reasonably be deemed to promote public welfare and to enforce that policy by legislation adapted to its purpose.”

Subsequently, in West Coast Hotel v Parish (1937), the Supreme Court dismisses substantive due process writing:

“Freedom of contract is a qualified, and not an absolute, right. There is no absolute freedom to do as one wills or to contract as one chooses. The guaranty of liberty does not deny the government the power to provide restrictive safeguards.”

Finally, in United States v Carolene Products Co. (1938) the Supreme Court defined in Footnote four by saying:

“Generally, laws regulating economic or social matters are presumed to be valid…if there is any conceivable rational basis on which the classification might relate to any legitimate government interest.”

These three precedents uphold the right of the state to subordinate individual interests to the general welfare, treat economic liberty as a non-fundamental right thus applying minimal scrutiny, and that any economic legislation need only be rationalized as having a legitimate intent.

CONSTITUTIONALITY

The Due Process Clause of the Fifth Amendment of the Constitution states:

“…nor be deprived of life, liberty, or property, without due process of law.”

As it pertains to this case of economic liberty, to what extent has procedural (i.e rational basis) rather than substantive due process been constitutionally applied and to what extent does Positivist Law exclude it as non-fundamental? It also appears again in the Fourteenth Amendment, the Equal Protection Clause:

“…nor shall any state deprive any person of life, liberty, or property without due process of law“.

The concepts of Due Process and Equal Protection must be of importance if it’s mentioned twice in the Constitution and is included in the Bill of Rights. The key issue here is the application of the rationality test of procedural due process.

Continued in part two…

The Seven Rules of Bureaucracy

Gregory — Mon, 02 Apr 2012 22:55:22 +0000

Loyd S. Pettegrew and Carol A. Vance give an excellent article detailing the nature of American bureaucracy. It begins by crediting Max Weber with its formalization as a means of organization in response to the Industrial Revolution. It then explains its operative nature and how it shapes and influences its message. Additionally, the article briefly states the alternative consequences both tangible and intangible stemming from the intended purposes and points out that such calculus is consistently absent. Lastly, numerous analogous examples are given throughout making case-in-points, supporting the rules validity, and concludes with four simple solutions for reversing its growth. I strongly encourage one to read the article in its entirety for depth and context otherwise below are the rules in summary form:

In the final analysis, this article seemingly validates what I have always suspected anecdotally about government operations. Pettegrew’s communications knowledge implicitly shows how similar a bureaucracy is comparatively to a corporate public relations department in controlling and manipulating the flow of information. Whereas a
corporation has internal metrics and external competition to force efficient
employment of its resources or face market punishment, a bureaucracy does not
regardless of its inefficiency which creates an incentive to propagate without recourse. By validating his rules through Harry Teasley’s first person experience and numerous citations it is my opinion that such an analogy holds. Thus, if the totality of the rules are seemingly true (i.e. factual) and one believes the analogy is valid (i.e. bureaucracy and corporations have similar public relations methods) then a possible conclusion would be the answer to the question, “why entrust a public bureaucratic solution as better than a private one given that the government has no effective metrics or repercussions?”

Pettegrew, S. Loyd, Vance, A. Carol. (2012). The Seven Rules of Bureaucracy. Ludwig Von Mises Institute. Retrieved April 2, 2012 from http://mises.org/daily/5955/The-Seven-Rules-of-Bureaucracy

Inside The Minds of Anti-Ron Paul Voters

Gregory — Tue, 06 Mar 2012 14:27:47 +0000

In a video by Tom Woods on February 28th posted on RonPaul.com, he makes the premise, “why so many people are voting for candidates other than Ron Paul”. Subsequently, he goes through a series of more than 13 arguments stating the anti-thesis of Ron Paul’s positions and attributing them as the alternative reasons not to vote for him.

The problem with this analysis is two-fold. First, his arguments are non-inclusive but merely a proxy. Woods attempts to inductively prove his conclusion. His arguments do not reflect the universe of possible arguments included to accurately reflect all anti-Paul reasoning. Instead, they are analogous to a sample versus a population statistic. Second, his analysis is inconclusive. Although logically sound, unless one is already a Paul advocate it does nothing but seemingly affirm the alternative. It fails to explicitly contrast Paul’s positions, only weakly through absurdity. Woods ought to have stressed Paul’s general principles and given a few of his examples to contrast, concluding that the alternatives themselves are not viable.

In the final analysis, Woods does a sound job in citing examples of the alternatives but as pointed out does nothing to support the alternative of his own premise. Outside of Paul supporters, there is little to extrapolate from this and it could possibly lead to reinforcing his own premise without due contrast. Completing his analysis would make it complete.

We Don’t Quit Know What We Are Talking About When We Talk About Volatility

Gregory — Wed, 15 Feb 2012 17:22:07 +0000

I have been skeptical for over three years now about the underlying assumptions and application of statistics for economic and financial metrics. In my last article I briefly touched on the former so I will now do so for the latter case. Again, I will address an acute
example as a primer.

Daniel Goldstein of the London Business School and Nassim Nicolas Taleb of NYU Polytechnic Institute published a paper in 2007 titled, “We Don’t Quite Know What We’re Talking About When We Talk About Volatility” and judging by their results it seems to be true. The question was to calculate a simple daily and annual standard deviation with given assumptions and data. Portfolio analysts, assistant managers, and managers, financial engineering students, and banking analysts for a major bank alike all got incorrect answers. Out of 87 selected participants only three got the first answer correct and zero got the second answer correct. However, I believe the crux of the study is not that the participants got the incorrect answer but the flawed logic that led them to it. The study noted that their knowledge of the formula was correct yet the participants seemed to reason that mean absolute deviation (MAD) and standard deviation (s) both second-order moments, are one and the same. MAD measures absolute differences in magnitude of error while s is a point estimate of the population standardized deviation. In other words, they are similar but different measures. Goldstein and Taleb also seem to point to a more in-depth analysis in that the sample standard deviation fails to account for outlying deviations that distort Gaussian tails. Namely, they pinpoint the ratio of these measures which is a type of fourth-order moment of kurtosis which is concerned with the curve height relative to the length of its tail extensions which can have real effects on volatility measures. Its formulation is highlighted below in mathematical form as well in his paper (click expression):

If one reads Taleb’s book, Fooled by Randomness as well as seemingly any of his research this is a constant theme, stressing remote possibilities as having more influence in distorting the actual probability of outcomes despite their extremity. Thus, his particular case seems to include remote deviations via fourth-order moments as a more accurate measure of volatility. While these concerns may be more or less relevant depending upon on the data and hedging strategies in place, I suspect him to be on the fringe of academe in his notions to some degree but overall he certainly has articulated evidence to support his claims and yet I do identify with most them.

In the final analysis, I presented his work and my commentary as a challenge to a basic assumption in financial metrics as to conclude that with independent thought and unique analysis one can utilize more realistic and applicable knowledge and act on it profitably rather than reinforce inaccurate assumptions.

Bowerman, B., Koehler, A., O’Connell, R. (2005). Forecasting, Time Series Regression, and Regression (4th ed.). Belmont, CA: Thomson Brooks/Cole.
EnumaElish. (2007, November 22). Mean Absolute Deviation / Standard Deviation Ratio. Physics Forums. Retrieved February 11, 2012 from http://www.physicsforums.com/showthread.php?t=199764
Goldstein, D. G. & Taleb N. N. (2007). We Don’t Quite Know What We Are Talking About When We Talk About Volatility. Journal of Portfolio Mangement, 33 (4), 84-86. Retrieved Februaury 11, 2012 from http://ssrn.com/abstract=970480
SAS Institute Inc. (2006). Statistical Background. SAS Elementary Statisitcs Procedures. Retrieved February 11, 2012 from http://support.sas.com/onlinedoc/913/getDoc/en/proc.hlp/a002473332.htm

Jobs And Fuel Prices Weigh On U.S Confidence

Gregory — Sat, 04 Feb 2012 06:24:20 +0000

I want to explain a specific point that serves to undermine the recent optimism in the final weeks of 2011, commodity inflation. It is my opinion that generally the scenario has been a combination of less dollars earned (i.e. unemployment) chasing a more expensive good (i.e. gasoline) which proportionally has diverted spending from non-essential consumption and savings which contributed to lower holiday retail sales, continuing weak housing activity, and lowered consumer confidence as reported in last Tuesday’s Financial Times article.

Going back to late 2009 the spot price of gasoline was trading around $1.20 and has since surged to $2.89. Problem is, since three years ago the inflation-adjusted amount of today’s spot of this price is $3.02, a differential of $.23. This price is according to the latest CPI data, an inflation rate of 4.8% which is a conservative estimate at best. Given that it has already been refined into gasoline, I suspect that crude oil fluctuations and refining expenses have been priced in. However, this price is at the wholesale level which is absent of distribution, retail profit margins, and taxes so these factors may explain most of the difference between spot and pump prices. However, my hypothesis is: if we had a bull market in line with such price appreciation we ought to expect similar price action prior to July of 2007 when demand was strong and crude oil was trading up to almost $150 per barrel. Conversely, since there has been a prolonged weak global economic environment since late 2008 and oil is currently trading below $100 one can reasonably conclude that perhaps there is some inflationary element fueled by the lack of demand and reflected in the divergence of crude oil and gasoline prices. Also, I suspect that a unitary change in gasoline spot price can be greater than it was during the lead up to the oil bull market of 2007. Thus far, my superficial analysis seems to indicate that this is the case on more than several occasions despite the seemingly strongly correlation between gasoline and crude oil in the graph below.

In the final analysis, I only wanted to treat this specific subject as a starting point to make an accurate and informed first pass to the reader to think about such matters. There are a multitude of other economic factors that undermine such ignorance like monetary policy and quantitative easing, compliance with increasing regulations, and fiscal policy in lieu of U.S sovereignty credit downgrades. The point is that with some independent thought and more thorough analysis one can discover a more realistic and accurate economic state and act profitably despite the mainstream opinion.

Bond, Shannon (2012, January 31st). Jobs and fuel prices weigh on US confidence. Financial Times. Retrieved from http://www.ft.com
$GASO Unleaded Gasoline – Spot Price (EOD) (2012, January 31st). StockCharts.com. Retrieved January 31st 2012, from http://stockcharts.com/h-sc/ui?s=%24GASO
Inflation Calculator (2012, January 19th). US Inflation Calculator. Retrieved February 1st, from http://www.usinflationcalculator.com/
U.S Department of Energy (2012, February 1st). Weekly Cushing OK WTI Spot Price, Weekly New York Harbor Reformulated RBOB Regular Gasoline Future Contract 1. U.S Energy Information Administration. Retrieved February 3rd, from http://www.eia.gov/dnav/pet/pet_pri_spt_s1_w.htm

[Citation Needed] From SOPA, Protect IP Advocates

Gregory — Sat, 21 Jan 2012 05:51:30 +0000

S. 968, The Preventing Real Online Threats to Economic Creativity and Theft of Intellectual Property Act of 2011 (Protect IP) is being brought to the Senate by Patrick Leahy (D-Vermont) and 40 co-sponsors and is to be voted on the 23rd. Even though at this point it is most likely to fail, Senator Harry Reid (D-Nevada) is calling for a cloture vote later this month on their version of the Representative Lamar Smith’s (R-Texas ) Stop Online Piracy Act which comes to vote next month in the House.

Upon summary of this legislation it seems to seek to fulfill the shortcomings in intellectual property (IP) protection. As of 2009, a U.S International Trade Commission reported that they lost an estimated $48B from outside of its borders to China alone. Essentially, it is trying to securitize American business IP by empowering the Department of Justice’s Attorney General to use injunctions to cease and desist web sites outside of the U.S network by policing search engines, domain registers, advertisers, financial transfer payments, etc. It will grant immunity to comply with the law and who report such web sites. Problem is it expects online entities to police the Internet on behalf of U.S IP upon industry estimates that are unreliable according to Julian Sanchez. He also talks about how such firms maybe just circumventing competition and more precisely how much piracy is a result from not competing versus true pirating?

The thinking behind the opposition to this legislation seems to resemble a cum hoc ergo propter hoc argument. However, given the past histories of other legislation, I do have to give credence to this argument as being quite probable. Legislation proposed to stop international piracy may be passed and set precedence or be amended to thwart questionable domestic IP infringement as well further extorting content censorship and monopolization as protested by the likes of Wikipedia, Google, Facebook, etc.

Subsequently, it does raises some significant questions like, where does the right of IP ownership end? If I purchase the property, then do I not own it? Or have I purchased only the right to use it? At some point, transfer of ownership needs to take place when market profits have been taken in exchange for the property. In my opinion, what seems to be coming about is the use of lobbying in delimiting, controlling and maximizing profits of IP at the expense of competitive practices. By logic of the firms supporting this legislation it seems they wish to own the IP from production to personal ownership and it would require immense policing and regulation only starting with PROTECT IP and SOPA.

In the final analysis, I think that the Federal government ought not to be involved in the protection of IP and profit interests of private enterprise to the extent that it has. Instead it ought to be private enterprise defeating or at least containing piracy by economic means via creating new modes of mediums and profitability, not protecting profits by lawsuits.

Sunlight Foundation. (2012). Congress (Version 1.0.0.0). [Mobile application software]. Retrieved from http://market.android.com/
United States International Trade Commision. (2011, May). China: Effects of Intellectual Property Infringement and Indigenous Innovation Policies on the U.S Economy. Retrieved from http://www.usitc.gov/publications/332/pub4226.pdf
Sanchez, Julian. (2012, January 18th). [citation needed] From SOPA, Protect IP Advocates. CATO Podcast. Podcast retrieved from http://www.cato.org/multimedia/daily-podcast/citation-needed-sopa-protect-ip-advocates
Israel, Josh (2012, January 18). Who Is Lobbying For And Against Protect IP Act. Retrieved from http://thinkprogress.org/politics/2012/01/18/406397/chart-who-is-lobbying-for-and-against-the-protect-ip-act/

IMF Requests $500B For Bail-Out Loans

Gregory — Wed, 18 Jan 2012 16:47:01 +0000

It comes to me as no surprise that the financial socialization in Europe has been working so well that the managing director of the International Monetary Fund (IMF), Christine Lagarde who is also the Finance Minister of France has requested an additional one-half trillion dollars. This in her own words according to the Financial Times is, “…ensuring adequate fund firepower to help defuse the current global economic weaknesses and regional challenges.” Evidently, almost two years of solutions is not enough or they were just poorly constructed solutions. Perhaps, this could this have something to do with the recent downgrade of the European Financial Stability Facility on Monday?

Europe seems to be only creating further layers of financial bureaucracy after its previous layer failed to achieve its purpose with no perspective on the issue. The European Union (EU), through the IMF is furthering not a closer fiscal union but a system of sovereign transfer payments and re-distribution of capital. It is akin to parents paying for their children’s credit spending instead of telling them to cut their liabilities and increase their revenue. I think it continues to be a more divisive manner within the EU rather than the intended effect. This is the result of privatizing gains (i.e. EU membership benefits) and socializing the risk (i.e. sovereign fiscal default) by those weaker member countries like Greece, Italy, Spain, and Portugal.

Beattie, Alan (2012, January 18th). IMF requests $500bn for bail-out loans. Financial Times. Retrieved from http://www.ft.com